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Direct Line Insurance Group plc could make a great buy for your starter portfolio

Direct Line Insurance Group (LSE: DLG) has slightly outperformed the FTSE 100 over the past year, rising 6.5% against 4% across the index as a whole. The personal and small business general insurer has just posted preliminary results for the year ended 31 December and the share price has reversed 1.49% at time of writing. However, much of the good news was priced in following positive guidance last month, when management predicted higher-than-expected profits and special dividend growth. It has delivered on both.

Direct action

I can see a lot to admire, with the group reporting a “strong financial performance” and cheering shareholders with an impressive 40.2% dividend hike to 13.6p, plus a special dividend of 15p. This amounts to a cash return of £486m to shareholders for 2017.

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Financial highlights included 9.3% growth in insurance premiums from its direct own brands and 5.3% for in-force policies, driven by continued momentum in motor. Operating profit from ongoing operations leapt 51.4% to £610.9m, up from £403.5m in 2016. This was primarily due to the non-repeat of 2016’s Ogden discount rate, used to calculate personal injury claims. Profit before tax jumped 52.7% from £353m to £539m.

A certain ratio

Direct Line’s reported expense ratio was in line with 2016, with its underlying expense ratio rising by 0.5 percentage points to 23.5%. Income seekers will share in the company’s success, with dividends for 2017 totalling 35.4p, up an impressive 43.9% from 24.6p. At the start of the year, analysts were expecting a total distribution of around 29p.

Chief executive Paul Geddes hailed a fifth successive year in which we have delivered a strong financial performance”, with significant growth in its direct own brand policies as customers respond positively to recent improvements.

Buffet style

Geddes said today’s results show management has delivered on its priorities to maintain revenue growth, reduce expense and commission ratios, and deliver underwriting and pricing excellence. The group plans to continue investing in technology and the customer experience and is confidently targeting a combined operating ratio of 93% to 95%.

Direct Line’s admirers include the Fool’s very own Rupert Hargreaves, who recently called this is a Warren Buffet-style stock that could make you a million. He praised the group’s predictable cash flows, saying they support larger cash distributions to investors, and today’s results appear to confirm his view.

Eyes on the road

Last November I said that stocks like Direct Line can form the bedrock of a comfortable retirement portfolio. At the time it was trading at a discounted forward valuation of 10.9 times earnings, a figure that has clicked up slightly to 12.3 times, which still looks undemanding.

Its forecast dividend is now a healthy 7.5% for 2018 and 7.4% for 2019, with cover of 1.1. Any share price growth on top of that would quickly lift the total annual return into double figures. I do not predict a massive share price surge, referencing today’s cool reaction, but it looks like a strong long-term dividend and growth buy-and-hold to me, and a good place to start your portfolio.

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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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